Kotlas: Russia’s Bankruptcy Capital

Kotlas, a district center in Arkhangelsk Region, will be one hundred years old in 2017. During the first half of the twentieth century, it was one of the main transit centers for political prisoners, but nowadays it is the capital of individual bankruptcies. There is no work in the city, which over the past ten years has become a local consumer’s paradise, and every fourth resident is up to their ears in debt.

In 2012, Kotlas resident Tatyana and her entire family, including her husband, daughter, and brother, took out a total of five million rubles in loans from banks. She asked we not reveal her surname, since her husband is unaware their daughter also took out a loan. As Tatyana says, they took out the loans not for themselves, but for a friend.

“I worked for two female entrepreneurs who sold clothing. We had known each other for something like twenty years. We would visit each other’s homes, go to each other’s birthday parties, and attend the weddings of each other’s children,” Tatyana recalls. “One of them, in fact, asked me to take out the loans because otherwise, she said, they would have to borrow at an interest rate of eight percent on the black market.”

“I worked for my friends selling luxury clothing. The turnover was good so I was not particularly afraid,” she explains.

Soon afterwards, her friends persuaded to take out additional loans for them. Her husband, daughter, and brother agreed to do this, borrowing 900,000 rubles, 1.8 million rubles, and 700,000 rubles, respectively. The deal was based on trust. Tatyana’s family handed the loan agreements over to the female entrepreneurs, and they paid back the loans themselves. This went on for two years.

“In 2014, the police came and searched our workplace. It turned out the women had been running something like a pyramid. They had been borrowing money on paper to purchase goods. They had not been buying anything, however, but had been cashing out the loans,” say Tatyana. “That is how we got in trouble, although we had not taken out the loans for ourselves.”

The banks demanded repayment of the loans. At first, Tatyana admits, she felt like hanging herself.

“But that is no solution. A woman I know hung herself over a loan. Someone shot himself. Well, if I hung myself, the debt would have been passed on to my relatives. So I got up and went to work.”

She was also lucky. The police filed criminal charges against the female entrepreneurs, and Tatyana’s entire family were granted victim status. A total of ninety people were identified as victimized borrowers in the case. In October 2015, a law on bankruptcy came into force that enables invididuals to write off debts. It was like manna from heaven for Tatyana. Thanks to the criminal case, she and her daughter were declared bankrupt, and her husband and brother are currently awaiting an arbitration court’s decision.

“The government gave me a chance to go on living. I can breathe freely, but I’ll never go near a bank again!” she says.

“We give loans! Approved.” There are fewer lenders in Kotlas nowadays, but it is still no problem to get a loan. Photo courtesy of Alexander Miridonov/Kommersant

The story of Tatyana and her family is typical of Kotlas. Located near the border with the Republic of Komi and far from major cities (it is 600 kilometers from Arkhangelsk, and 1,000 kilometers from Moscow), Kotlas, which was renowned for being part of the Gulag, has suddenly become Russia’s personal bankruptcy capital. In an interview with the newspaper Pravda Severa, Alexander Tsygankov, presiding judge in bankruptcy cases at the local arbitration court, acknowledged that Kotlas ranked first among towns in Arkhangelsk Region for individual bankruptcy filings.

Kotlas has 60,000 residents—and six court-appointed receivers.

“Kotlas has been lucky. Together, we have freed around 140 residents from their debts,” says Vitaly Nepein, the city’s most well-known receiver.

His colleagues have completed two to three cases, but, according to Nepein, he has completed or is wrapping up 120 individual bankruptcies in Kotlas, and 174 cases nationwide. Until recently, the Kotlas man was ranked first in the Russian Federal Registry on Bankruptcy Information in terms of numbers of individual bankruptcy cases handled. According to Nepein, however, his hard work has not been enough.

“According to my calculations, 15,000 people want to file for personal bankruptcy.”

That is 25% of Kotlas’s residents. No other city in Russia has that many bankruptcy claimants.

A Consumer Paradise

Bankruptcy manager Vitaly Nepein believes bankruptcy is a therapeutic procedure that relieves not only headaches but all sorts of ailments. Photo courtesy of Alexander Miridonov/Kommersant

Kotlas is a city with a tragic history in which there are cultural centers, hundreds of shops, sports clubs, art schools, a newspaper and a TV station, a drama theater and two broad rivers, and, finally, an airport, whence, for 4,700 rubles, you can fly in a nineteen-seater Let L-410 three days a week to Arkhangelsk and Syktyvkar. In short, it has everything except jobs.

The city has two centers. The old center was built in the 1930s and 1940s by deported “enemies of the people,” dekulakized peasants, Poles, and Germans. The new commercial center was built for their descendants. The Gulag’s legacy in Kotlas consists of residential buildings and cultural centers featuring neoclassical dector, weathered brick and wooden houses, a cemetery for the exiles who died here, and unburied human remains, which are found from time to time.

The new center is now a consumer paradise. Kotlas’s 60,000 residents have the use of seven shopping malls, the largest of which, the four-story Stolitsa (“Capital”), has 30,800 square meters of floor space. It houses the four-screen 3D Rublion movie theater, where a ticket costs between 150 and 300 rubles.

In Komi, kotlas means “pit.” People from all over Arkhangelsk Region and the neighboring Vologda Region and Republic of Komi come to “the pit” to shop.

“We constantly have people from Veliky Ustyug, home of Grandfather Frost. It’s only 60 kilometers away. Gas workers, loggers, and workers from the paper mill in Koryamzha, who earn good money, come here. People even come from Syktyvkar. It’s only five hours by car,” says Tatyana, a former shop clerk at the Admiral, another shopping center, which boasts 11,000 square meters of space.

The local press describes Kotlas as a “city of expensive fur coats and cars.” It is only minus five degrees Celsius outside, but one already encounters women in fur coats. Most of the women look to be over thirty.

“People have always dressed well in Kotlas. They know their way around fur coats, and some people have more than one. It matters here,” says Tatyana. “The coolest coats are sable or mink with sable or lynx trim. No one here would wear a plain mink coat.”

Women wearing beaver fur coats are to be seen on the streets too, but they rank lower on the local totem pole, apparently.

“Our coats would cost between 250,000 and 270,000 rubles, and people would pay for them in cash like it was nothing,” recalls Tatyana. “And our dresses were not cheap, either. They started at 10,000 rubles. Ties cost 3,000 rubles a piece, and men’s shirts ranged between 3,000 and 5,000 rubles. They sold well: we had clients coming all the way from Arkhangelsk itself. It was because we imported clothing from Italy and Greece.”

Although the city is small, there are lots of cars on the streets, and they are not cheap. A typical scene in Kotlas is a Toyota parked next to a wooden barracks. Kotlas residents say the city has the largest number of expensive cars per capita. On weekdays, traffic jams form at the stoplights. But public transportation is practically invisible in Kotlas. It is used by those who cannot afford their own car. However, the lack of a high income is not a problem for many people: they buy cars with loans. Moreover, according to Nepein, the going rate is one million rubles.

“There are lots of expensive rides here, including Harleys. Very few people drive jalopies,” notes Tatyana. “Many people have got into trouble due to car loans. Nowadays, owners of Tuaregs even work as gypsy taxi drivers to pay back their debts. No one would be surprised if owners of Lexuses began working as taxi drivers.”

They will have to save up for a long time. A trip around the city costs a mere sixty to seventy rubles.

Cars in Kotlas are not a luxury, but a means of transportation. People spend their last kopecks and take out loans to buy them. Photo courtesy of Alexander Miridonov/Kommersant

Kotlas residents are proud not only of their cars and fur coats but also of their MP, Andrei Palkin, who built affordable housing that cost less than 50,000 rubles per square meter. The businessman, who was elected to the State Duma on the United Russia list, was the richest MP in the lower house’s previous sitting. His declared income for 2015 was nearly 1.5 billion rubles, writes RBC, and he owns fifty-nine apartments in Arkhangelsk and Moscow Regions, and 200 vehicles. The MP himself explained that the 1.5 billion rubles was the “total gross turnover” of the holding company he heads. Palkin started out in the 1990s in logging before taking up housing and road construction. In Kotlas, where the MP built a housing estate the locals have dubbed Palkin Street, he is often remembered as someone who did well.

“He is a modest guy. He didn’t show off, and lived like ordinary people,” says Tatyana.

Some Kotlas residents even sympathize with him.

“They crushed him. He ran his business like an individual entrepreneurship. He paid the minimum wage, and paid the rest under the table, and they wanted to take his head off for it, since he was not contributing much to the budget. He barely managed to beat the rap, but he signed the business over to his son.”

Many locals cannot afford even the affordable housing Palkin built, so it is purchased, for example, by residents of Koryazhma, twenty kilometers from Kotlas.

“There is a paper mill there, and it smells constantly, so people build houses here and drive to work there. It takes thirty minutes,” explains a local woman, who is also bankrupt.

Once upon a time, the main employer in Kotlas was a river transport shipyard. It was followed by an electrochemical plant that filled orders for the military.

Kotlas has a large selection of watches, including Swiss watches. You can order almost any watch you like. But they are not especially popular among the townspeople of Kotlas. Photo courtesy of Alexander Miridonov /Kommersant

“Nowadays, the main business is retail trade,” says Nepein, who began his career in the Department for Combating Misappropriation of Socialist Property (OBKhSS).

A local jobs website lists 310 positions, the majority of them for sales reps and loan specialists. The pay is between 14,000 and 25,000 rubles a month. The shop clerks joke glumly that they sell things to each other.

“There is no work anywhere. People pick berries and mushrooms, cash them in to wholesalers, and get their hands on money somehow,” says Nepein. “There was a upturn of sorts in the noughties, but I think it was due to the oil price. Nowadays, though, incomes have hit bottom.”

In May 2015, Vecherny Kotlas newspaper published a survey of city residents, 25% of whom acknowledged they did not have enough money to last until payday: they had to borrow. Another 19% reported spending their entire paycheck on daily expenses. Only 4% of Kotlas residents were able to afford almost anything they wanted.

Many locals have not been able to afford the new Kotlas.

“The main consumers are pensioners. Their pensions are supplemented by 50%, since this region is part of the Far North. For nearly forty years on the job, I get, for example, 12,700 rubles a month. And then there are the state employees,” says Nepein.

Civil servants buy the luxury goods, explain the shop clerks, but the main consumers have been businessmen, although things are not so great for them anymore. Loans were the magic wand for many people. The city was served by fourteen major banks, including Sberbank, VTB 24, Orient Express Bank, Severgazbank, Rosbank, Gazprombank, Sobinbank, and Rosgosstrakhbank.

“Loans were handed out like loaves of bread. Loan managers got paid based on how many loans they made, so they gave loans to everyone,” says Tatyana. “There were reps from four banks in the appliance department alone. It was like that until quite recently.”

Some banks have left the city. Rosbank, for example, closed its Kotlas branch in June 2016; the bank’s press service reported the closure was “part of optimizing the regional network.” Meaning the bank was not satisfied with the economic situation in the area and the branch’s profitability. Home Credit has also closed its branch in Kotlas. Microfinance institutions still operate in the city. Kotlas is dotted with ads urging residents to “borrow up to 30,000 rubles.”

“There are around fifty such companies in town,” says Nepein.

Bankruptcy Therapy

Mushrooms and berries are a traditional northern trade that helps the populace make ends meet. Photo courtesy of Alexander Miridonov/Kommersant

A friend of Tatyana’s also took out six loans at the request of acquaintances. She was paid 5,000 rubles for each loan.

“She is a single mother with three children, and so she got taken for 30,000 rubles. She had a room in town. She sold it and moved to an abandoned village so no one would find her. She fixed up a shack there and has been living in it. She works as a shop clerk for 13,000 to 15,000 rubles a month and sits quiet as a mouse. But the gal is only thirty-five!” sighs Tatyana.

According to her, there are many such stories.

“Gals in debt survive however they can.”

According to Nepein, there are huge number of such cases in Kotlas.

“Many people gave money to entrepreneurs.”

Nepein estimates that seventy to eighty percent of the problem loans in town involve con jobs in which “the borrowers were conscientious and handed the money over to someone else.” Usually, the people willing to do this have been low-income earners, people making 18,000 to 20,000 rubles, claims one of the victims. Nepein has observed that three schemes have been in play in these cases: “cars,” “employers,” and “bachelorette parties.”

The first scheme involves car loans. A loan is drawn up. The car dealer gives the borrower a fur coat and rug “in gratitude” for their services and assures him or her the loan will be paid off. The money disappears into a limited liability company, and the car is not actually sold. The dealer who talked the client into going along with the scheme declares bankruptcy. The loan payments stop.

“There are lots of scams involving cars in Kotlas,” notes Nepein.

“Exchange, sale, purchase, rental of real estate.” To move into decent housing, Kotlas residents take out mortgages and make the first payment with their multiple-child allowance. After that, it all depends on luck. It is hard to find a full-time job in the city. Photo courtesy of Alexander Miridonov/Kommersant

The second scheme involves a person taking out a loan to get a job.

“He is hired so long as he borrows three to five million rubles from a bank for the company. He doesn’t get a receipt. The loan is ostensibly for growing the business, and the boss takes care of paying back the loan,” explains Nepein.

In reality, the boss uses the loan to pay the new employee’s salary, and the loan is ultimately not paid back.

The third scheme is private. Young ladies get together for drinks, and a girlfriend from a bank sets them up with credit cards that the debtors have to hand over to her or a businessman. Or the businessman himself persuades them to take out a loan for him.

Nepein describes one of the stories he has heard.

“The young lady has taken out a loan for one million rubles, and has been given a fur coat, washing machine or rug as a gift. She is told they will pay off the loan, and for two or three months they really do make payments. Then that is it. A year later, the young lady gets a notice saying she is six months overdue in her payments.”

“Auto pawn shop: money loaned with car as collateral. Large sums loaned with real estate as collateral. Money for you right now.” The banks offer loans to all comers, and there are lot of people in town who stupidly took out loans, as the locals say. Photo courtesy of Alexander Miridonov/Kommersant

Tatyana describes incidents that happened two years ago.

“We had a guy in the appliance department who made money by turning loans into cash. Ordinary folks could come to him, and he would offer them a loan of 130,000 rubles to buy an appliance. The people would keep 30,000 rubles for themselves, he would take a cut of 100,000 rubles, and the appliance would not be sold,”

Loans seem to have become something like a cottage industry in Kotlas. Loan managers at banks are involved in all the schemes, sometimes for kickbacks.

Nepein describes the scheme.

“A woman who works at banks says to her girlfriends, ‘Gals, you don’t have any property? Okay, I’ll give you million rubles each. What’s wrong with that? In any case, they can’t get anything from you.’ She collects their internal passports, the young ladies get the money, and they give her a kickback of 100,000 to 200,000 rubles each. One or two months later, the loan manager quits her job at the bank.”

Nepein says that state agencies are neglecting the law on bankruptcy.

“As soon as the administrative arm and the collectors are removed, and payments to retail consumers are reduced, there will be a massive wave of bankruptcies. Precedents will be set, people will come back to life, and the economy will pick up.”

Maybe he is right. After bankruptcy, Tatyana has gone from being a shop clerk to managing two dozen pharmacies.

“I compare people before and after bankruptcy. People come back to life, they start to interact with other people,” says Nepein. “The expression on their face changes. People who were suffering from high-blood pressure and diabetes get better. Some people glow just like the sun. People in Russia call them ‘sick.’ They are not sick. They just took on this burden in keeping with the Russian mindset—we are all trusting like this—and it pushes them down to the ground like a stone.”

People in Kotlas say the area is emptying out: in the past five years, 300,000 people have left Arkhangelsk Region. There are thus ever fewer professionals in the city. Photo courtesy of Alexander Miridonov/Kommersant